Preceding the crisis


Onset of the Crisis




Adopted policies


Reflections on the crisis

Asian Financial Crisis

Preceding the crisis
Prior to the Asian financial crisis, the Southeast Asian economies generally possessed a good economic standing. The annual economic growth rate of Malaysia was reported to be 8.5% for 6 years, from 1990 to 1996.
Even though Malaysia and Indonesia recorded larger debts, that is 42% and 24% of Gross Domestic Product (GDP) respectively, the government ran surpluses since 1993. Thus, it is commonly acknowledged that if the economy is recording positive growth, there should not be a problem for financing the country’s debts, be it foreign or domestic debt.

Onset of the crisis
 As the Thai baht was pegged to the USD before the crisis, the Thai baht experienced a speculation of its devaluation which led to the eventual de-pegging of the Thai baht to USD on July 2, 1997. This was followed by a wave of depreciation in Thailand’s neighboring countries as investor confidence weakened rapidly.

Within 6 months, the Malaysian ringgit lost about 40% of its value, whereas the Thai baht lost 55% of its value and the Indonesian rupiah depreciated by 80%. More than USD100 billion was also lost in the Malaysian stock market which a recorded lsot of USD140 billion in a year.

The Malaysian Ringgit (RM)
*The two dollar note is no longer in circulation

It was also noted that for some peculiar reason, the country’s stock market fell every time after Mahathir spoke against the economic market system.

And before June 1997, most of the world was confident about the ability of Asian economies of governing the continuous growth. For instance, two weeks before the collapse of the Thai baht, Michel Camdessus who was the Managing Director of the International Monetary Fund (IMF), complimented Malaysia’s ‘sound economic management’ [Somun 202]. Furthermore, in the annual World Competitiveness Yearbook published by the American International Institute for Management Development (IMD) ranked Malaysia as the second most economically competitive country in the world, after the United States, whereas Singapore was ranked third. Although it was mentioned that Malaysia was faced with some minor economic problems.

In regards to those minor economic problems, Malaysia indeed undertook some measures to control its fast economic growth and halving the current-account deficit. The IMF even went on to suggest Malaysia as an economy “that justifies the confidence of the markets” [Somun 202].

George Soros, who gained fame with his billion dollar profit earned from speculating against the currency in 1992, was accused by Mahathir of taking revenge on Malaysia and Thailand for supporting Burma’s entry into ASEAN by driving the local currencies down [Stewart 38]. Soros, who previously made known his disapproval of Burma’s admission into ASEAN, replied that he had no time taking part in currency speculation for political purposes and in mid-1997, his group only sold USD10 million of Thai baht and no other regional currencies

Dr. Mahathir Mohamd and George Soros in 2006

Mahathir also said that currency trading is unnecessary, unproductive and immoral during the IMF and World Bank meeting in Hong Kong which took place in the middle of September 1997. In refute, Soros commented that the currency trading ban suggested by Mahathir was “unworthy of serious consideration” [Somun 207] and that Mahathir himself was a menace to his own country,

After the crisis, Mahathir eventually recollected his thoughts and said, “Summing up relations with Soros, after finding solution, M said, “I have criticized American financier George Soros on several occasions for his role in the currency devaluations. This was never meant as an attack on the person as such, but Soros was one of most outspoken currency traders and .

probably the world’s most influential. Traders like him have an enormous responsibility since their very words can influence the livelihood of millions of people. Unfortunately, this responsibility is never acknowledged, and people who dare speak up and question the influence of currency traders are held up as heretics.” [Somun 211]

However, it is still evident that Mahathir still disapproves of Soros to a certain extent. When he received news that Soros was convicted in Paris at the end of 2002 for using privileged information to speculate in shares, Mahathir said, “I can never forgive him, though he now says that what I did was right. I can never forgive him because he created misery for 40 million people. They were already poor and he made them poorer. He made money, gave a few cents for charity and he was called a great philanthropist. Robin Hood stole money from the rich to give to the poor. That’s fine. Soros stole money from the poor, took it all for himself and then gave a few cents to poor people. That’s not a philanthropist. That’s not even Robin Hood.” [Somun 211-212]

Adopted policies
“My government and I decided to take the bull by the horns and work out a solution of our own.” [somun 208]

Before the sacking of Anwar from all his ministerial posts (including Minister of Finance), the Malaysian fiscal and monetary policy followed the tight policy recommendations prescribed by the IMF. This consisted of increasing interest rate, stifling credit, balancing the budget and imposing higher tax rates.

Right after the dismissal of Anwar in September 1998, Mahathir alongside the Central Bank of Malaysia decided to peg the ringgit to the USD at an exchange rate of RM3.8 for a US dollar and implement capital controls. These policies defied the dominant economic approaches, and many economists projected economic doom in Malaysia.

The main aims of the policies were to limit capital outflow from the country. As in April 1998, banks of foreign markets were offering ringgit deposit rates of over 30%. With the continuous outflow of capital, the government was faced with insufficient funds to improve the economy as the recession worsened.

[Lat, Berita Publishing Sdn. Bhd.]

To make matters worse, a major share of Malaysia’s international reserves were composed of “speculative international short-term capital” [Welsh ed. 295]. The outflow of foreign portfolio funds were also restricted with the policies imposed, and this managed to decrease the net outflow of portfolio funds between September 1998 and September 1999 to RM 1.3 billion.

In addition, it was also ruled that only people within Malaysia had to accept the exchange rate of RM3.8 per dollar, whereas other currencies were used outside the country and foreign trade was carried out in other currencies.

This managed to internalize the country’s currency, as the ringgit was rendered worthless once brought outside the country. The result of this is that the government was now capable of controlling the exchange rate and controlling its monetary policies. This is evident through the fact that the statutory reserve requirement (SRR) of the central bank decreased from 13.5% to only 4% in 2001, which expanded the money supply in the domestic market.

New regulations were also introduced in the Kuala Lumpur stock Exchange, including the requirement that stock purchases made in the country have to be owned for at least a year before being sold.

According the Case and Fair in the Principles of Macroeconomics book, capital controls are harder to impose in larger countries for long periods. Since Malaysia is a considerably small country, the restriction made on capital control had a higher probability of success.

Reflections on the crisis
Mahathir’s unorthodox economic approach during the Asian financial crisis has won both praises and condemnations.

Some critics argue that Mahathir was more concerned about protecting the interest of his cronies when he introduced the policies. Debt amounting to billions of ringgit was taken up by the government and privatized assets were “re-nationalized” at higher market prices, without any penalization in place [Welsh ed. 258]. They also argue that Malaysia’s rapid recovery from the financial crisis could be attributed to good luck as the increase in demand for electric and electronic exports helped boosted the growth experienced in 1999 and 2000.

Other critics instead praise Mahathir for realizing the flaws in the IMF prescribed policies of cutting government expenditures during recessions and restoring the banking system with government funds. In comparison with Philippines and Indonesia, the Malaysian economy recovered quickly from the crisis in comparison with Gross Domestic Product (GDP) based on Purchasing Power Parity terms recovering by the year 1999.[Welsh ed. 51]

For instance, Lewis wrote, “Malaysia’s counter - IMF policies during the financial crisis was apparently one of the best in solving the problem of the appreciating dollar and depreciating local currency” [Lewis 361].

Though, both sides generally agree that the policies succeeded in increasing liquidity in the financial system and improving market confidence.

In retrospect of the financial crisis during the late 1990s, Mahathir later wrote “I do not believe there was a conspiracy against East Asian nations, at least not in the conventional sense of the word. But obviously their troubles have afforded an opportunity to force upon their economies and allow domination by more powerful nations. Currency traders did not work in concert, nor did they put their heads together to consciously impoverish countries. But they did, and do, behave like herds. When one of the more influential members of this herd swings in one direction, the rest will follow. The effect is not unlike acting in concert.” [Somun 210-211]



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Last Updated Wednesday, April 13, 2009   Contact me at teh20y@mtholyoke.edu
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